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Interagency Guidance on Subprime Lending: Definition LENDERS = "Financial Institutions", and "Institutions' refer to INSURED DEPOSITORY and their subsidiaries attract lower credit quality accounts (referred to as sub-prime loans); loans to customers who are not subprime borrowers are referred to as “prime.”

Interagency Guidance on Subprime Lending: Definition LENDERS = "Financial Institutions", and "Institutions' refer to INSURED DEPOSITORY and their subsidiaries attract lower credit quality accounts (referred to as sub-prime loans); loans to customers who are not subprime borrowers are referred to as “prime.”

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Published by Mary Cochrane
The terms “lenders,” “financial institutions,” and “institutions,” in this document refer to insured depository institutions and their subsidiaries

Insured depository institutions extended their risk selection standards to attract lower credit quality accounts, often referred to as subprime loans

“subprime lending” is defined as extending credit to
borrowers who exhibit characteristics indicating a significantly higher risk of default than
traditional bank lending customers--loans to customers who are not subprime borrowers are referred to as “prime.”

Risk of default may be measured by traditional credit risk measures (credit/repayment history, debt to income levels, etc.) or by alternative measures such as credit scores. Subprime borrowers represent a broad spectrum of debtors ranging from those who have exhibited repayment problems due to an adverse event, such as job loss or medical emergency, to those who persistently mismanage their finances and debt obligations. Subprime lending does not include loans to borrowers who have had minor, temporary credit difficulties but are now current. This guidance applies to
direct extensions of credit; the purchase of subprime loans from other lenders, including delinquent or credit impaired loans purchased at a discount; the purchase of subprime automobile or other financing “paper” from lenders or dealers; and the purchase of loan companies that originate subprime loans.

Types of products offered as well as those that are not authorized;
_ Portfolio targets and limits for each credit grade or class;
_ Lending and investment authority clearly stated for individual officers, supervisors, and
loan committees;
_ A framework for pricing decisions and profitability analysis that considers all costs
associated with the loan, including origination costs, administrative/servicing costs,
expected charge-offs, and capital;
_ Collateral evaluation and appraisal standards;
_ Well defined and specific underwriting parameters (i.e., acceptable loan term, debt to
income ratios, loan to collateral value ratios for each credit grade, and minimum
acceptable credit score) that are consistent with any applicable supervisory guidelines;3
_ Procedures for separate tracking and monitoring of loans approved as exceptions to
stated policy guidelines;
_ Credit file documentation requirements such as applications, offering sheets, loan and
collateral documents, financial statements, credit reports, and credit memoranda to
support the loan decision; and
_ Correspondent/broker/dealer approval process, including measures to ensure that loans
originated through this process meet the institution’s lending standards.
The terms “lenders,” “financial institutions,” and “institutions,” in this document refer to insured depository institutions and their subsidiaries

Insured depository institutions extended their risk selection standards to attract lower credit quality accounts, often referred to as subprime loans

“subprime lending” is defined as extending credit to
borrowers who exhibit characteristics indicating a significantly higher risk of default than
traditional bank lending customers--loans to customers who are not subprime borrowers are referred to as “prime.”

Risk of default may be measured by traditional credit risk measures (credit/repayment history, debt to income levels, etc.) or by alternative measures such as credit scores. Subprime borrowers represent a broad spectrum of debtors ranging from those who have exhibited repayment problems due to an adverse event, such as job loss or medical emergency, to those who persistently mismanage their finances and debt obligations. Subprime lending does not include loans to borrowers who have had minor, temporary credit difficulties but are now current. This guidance applies to
direct extensions of credit; the purchase of subprime loans from other lenders, including delinquent or credit impaired loans purchased at a discount; the purchase of subprime automobile or other financing “paper” from lenders or dealers; and the purchase of loan companies that originate subprime loans.

Types of products offered as well as those that are not authorized;
_ Portfolio targets and limits for each credit grade or class;
_ Lending and investment authority clearly stated for individual officers, supervisors, and
loan committees;
_ A framework for pricing decisions and profitability analysis that considers all costs
associated with the loan, including origination costs, administrative/servicing costs,
expected charge-offs, and capital;
_ Collateral evaluation and appraisal standards;
_ Well defined and specific underwriting parameters (i.e., acceptable loan term, debt to
income ratios, loan to collateral value ratios for each credit grade, and minimum
acceptable credit score) that are consistent with any applicable supervisory guidelines;3
_ Procedures for separate tracking and monitoring of loans approved as exceptions to
stated policy guidelines;
_ Credit file documentation requirements such as applications, offering sheets, loan and
collateral documents, financial statements, credit reports, and credit memoranda to
support the loan decision; and
_ Correspondent/broker/dealer approval process, including measures to ensure that loans
originated through this process meet the institution’s lending standards.

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Published by: Mary Cochrane on Oct 19, 2012
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OCC 99-10
To: Chief Executive Officers of All National Banks, Department and Division Heads,and All Examining PersonnelThe Office of the Comptroller of the Currency (OCC), the Federal Deposit InsuranceCorporation, the Federal Reserve Board, and the Office of Thrift Supervision have jointly issued the attached “Interagency Guidance on Subprime Lending.” The guidancediscusses the risks inherent in subprime lending and establishes the agencies’expectations for proper business planning, risk management, and controls. A number of institutions have incurred significant losses and other problems because of poorly structured subprime lending programs. Generally, these institutionsunderestimated the higher default rates and loss-on-default rates involved withsubprime lending, as well as the higher overhead costs. Moreover, they frequentlylacked the management expertise, business planning processes, and risk managementprocesses necessary to manage these risks in a safe and sound manner.The guidance is effective immediately and applies to all national banks and their operating subsidiaries that engage in, or expect to engage in, subprime lending.Because of the higher risk associated with subprime lending activities, the OCC expectsbanks to fully understand the risks involved, exercise increased risk management, andprovide appropriate managerial, staffing, and capital support. Further guidance andexamination procedures for examiners reviewing the subprime lending activities of national banks will be issued shortly.For more information, please contact the Credit Risk Division at (202)874-5170. ______________________________ Emory W. RushtonSenior Deputy Comptroller for Bank Supervision Policy Attachment
 
 
Board of Governors of the Federal Reserve SystemFederal Deposit Insurance CorporationOffice of the Comptroller of the CurrencyOffice of Thrift Supervision
 
Interagency Guidance on Subprime Lending
March 3, 1999
Contents Page
Background and Scope...................................................................................................1Capitalization...................................................................................................................2Risk Management...........................................................................................................3Planning and Strategy.....................................................................................................3Staff Expertise.............................................................................................................3Lending Policy.............................................................................................................3Purchase Evaluation...................................................................................................4Loan Administration Procedures.................................................................................4Loan Review and Monitoring.......................................................................................5Consumer Protection..................................................................................................5Securitization and Sale...............................................................................................6Reevaluation...............................................................................................................7Examination Objectives...................................................................................................7
Background and Scope
Insured depository institutions have traditionally avoided lending to customers with poor credit histories because of the higher risk of default and resulting loan losses. However, inrecent years a number of lenders
1
have extended their risk selection standards to attractlower credit quality accounts, often referred to as subprime loans. Moreover, recent turmoilin the equity and asset-backed securities market has caused some non-bank subprimespecialists to exit the market, thus creating increased opportunities for financial institutionsto enter, or expand their participation in, the subprime lending business. The federalbanking agencies have been monitoring this development and are providing guidance onthis activity.
1
The terms “lenders,” “financial institutions,” and “institutions,” in this document refer to insured depository institutionsand their subsidiaries.
 
 
 
3
For the purposes of this guidance, “subprime lending” is defined as extending credit toborrowers who exhibit characteristics indicating a significantly higher risk of default thantraditional bank lending customers.
2
Risk of default may be measured by traditional creditrisk measures (credit/repayment history, debt to income levels, etc.) or by alternativemeasures such as credit scores. Subprime borrowers represent a broad spectrum of debtors ranging from those who have exhibited repayment problems due to an adverseevent, such as job loss or medical emergency, to those who persistently mismanage their finances and debt obligations. Subprime lending does not include loans to borrowers whohave had minor, temporary credit difficulties but are now current. This guidance applies todirect extensions of credit; the purchase of subprime loans from other lenders, includingdelinquent or credit impaired loans purchased at a discount; the purchase of subprimeautomobile or other financing “paper” from lenders or dealers; and the purchase of loancompanies that originate subprime loans.Due to their higher risk, subprime loans command higher interest rates and loan fees thanthose offered to standard risk borrowers. These loans can be profitable, provided the pricecharged by the lender is sufficient to cover higher loan loss rates and overhead costsrelated to underwriting, servicing, and collecting the loans. Moreover, the ability tosecuritize and sell subprime portfolios at a profit while retaining the servicing rights hasmade subprime lending attractive to a larger number of institutions, further increasing thenumber of subprime lenders and loans. Recently, however, a number of financialinstitutions have experienced losses attributable to ill-advised or poorly structured subprimelending programs. This has brought greater supervisory attention to subprime lending andthe ability of insured depository institutions to manage the unique risks associated with thisactivity.Institutions should recognize the additional risks inherent in subprime lending anddetermine if these risks are acceptable and controllable given the institution’s staff, financialcondition, size, and level of capital support. Institutions that engage in subprime lending inany significant way should have board-approved policies and procedures, as well asinternal controls that identify, measure, monitor, and control these additional risks.Institutions that engage in a small volume of subprime lending should have systems inplace commensurate with their level of risk. Institutions that began a subprime lendingprogram prior to the issuance of this guidance should carefully consider whether their program meets the following guidelines and should implement corrective measures for anyarea that falls short of these minimum standards. If the risks associated with this activityare not properly controlled, the agencies consider subprime lending a high-risk activity thatis unsafe and unsound.
Capitalization
The federal banking agencies believe that subprime lending activities can present a greater than normal risk for financial institutions and the deposit insurance funds; therefore, thelevel of capital institutions need to support this activity should be commensurate with theadditional risks incurred. The amount of additional capital necessary will vary according tothe volume and type of subprime activities pursued and the adequacy of the institution’s
2
For purposes of this paper, loans to customers who are not subprime borrowers are referred to as “prime.”
 

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